Your Weekly Update for Monday, December 23, 2019
Markets will close early at 10:00 AM PST on Tuesday, December 24, 2019 for Christmas Eve and remain closed on Wednesday, December 25 in honor or Christmas Day. Have a wonderful Christmas!
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Have a great week!
Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
CERTIFIED FOR LONG-TERM CARE
NATIONAL SOCIAL SECURITY ADVISOR
Bill Roller
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
NMLS #107972
Summary
Markets were up last week. The Dow Jones Industrial Average rose 1.14% to 28,455.09. The S&P500 ended up 1.65% to 3,221.22, while the Nasdaq Composite finished up 2.18% to 8,924.96. The annual yield on the 30-year Treasury rose  9.6 basis points to 2.346%.
In a heavier week for economic releases, housing data came mixed but on a stronger trend as of late, industrial production increased more than expected, while manufacturing was mixed, as was labor data.
U.S. equity markets gained along with stronger geopolitical optimism, as did emerging markets, both of which outperformed foreign developed markets. Bonds lost ground on the heels of this better sentiment and accompanying higher interest rates. Commodities generally gained ground as well, led by energy and metals.
Economic Notes
(0) The third and final report on Gross Domestic Product for the third quarter showed was unchanged at 2.1%, which was largely as expected, although the composition under the hood changed a bit from the last estimate. Specifically, growth in personal consumption was revised up by several tenths of a percent to 3.2%, with higher spending on services as opposed to the negative revision for retail sales. Investment in structures was also negative, but revised to a slightly better decline, and inventories were also revised down a bit. Core PCE inflation was revised slightly higher, but to such a small degree that the year-over-year rate remained steady at 1.7%.
(0/+) The Empire State manufacturing index for December ticked up 0.6 of a point to 3.5, continuing in expansionary territory, but falling just short of expectations calling for a 4.0 level. New orders and prices paid declined by several points, but remained expansionary, employment remained flat but expansionary, while shipments ticked higher to further in expansionary territory. Expectations for business conditions six months out also increased sharply, by 10 points to a solidly expansionary level.
(-) The Philadelphia Fed manufacturing index fell by -10.1 points in December to a barely-positive level of 0.3, underperforming expectations calling for a 8.0 reading. New orders and shipments both increased further into expansionary territory, as did prices paid, but employment declined by several points (although it remained in expansion). Expectations for business conditions six months out declined by less than a point, but remained strongly positive and expansionary. So, all-in-all, an unusual report, but not as bad as the headline number appeared.
(+) Personal income for November rose by 0.5%, which beat forecast by a tenth, while personal spending rose 0.4%, in line with expectations. The personal savings rate ticked up a tenth to 7.9%. The PCE price index ticked up just under 0.2% on a headline level and 0.1% on a core basis for the month, bringing year-over-year PCE inflation to 1.5% and 1.6% for headline and core, respectively, which remain below the Fedâs 2.0% target based on PCE.
(+) Industrial production rose 1.1% in November, beating expectations calling for 0.9% and reversing the decline in similar magnitude from the prior month. In fact, this was the largest single-month gain in several years. The manufacturing production component gained an identical 1.1%, due to auto production ramping up by over 12% as the General Motors strike concluded. Segments outside of autos rose by just under a half-percent, including gains in consumer non-durable areas, which is a positive sign. Business equipment rose by nearly 2%, while utilities gained 3% for the month to help lead the headline figure. Capacity utilization rose by 0.7% to 77.3%.
(-) November existing home sales fell by -1.7% to a seasonally-adjusted annualized rate of 5.35 mil. units, which was deeper than the expected decline of -0.4%. Single-family sales fell by over -1%, as did condos/co-ops by -5%. Regionally, the South and West saw declines of up to -4% on the month, while the Midwest and Northeast experienced minor gains of a few percent each. Despite the drop, sales are up nearly 3% from a year ago. The median existing home sales price rose to $271,300, up over 5% from this time last year. Inventory has also reversed course and declined, to 3.7 months supply, which remains low and has been such for several years. In fact, almost half of homes sold last month were on the market for less than a month.
(+) Housing starts for November rose by 3.2% to a seasonally-adjusted annualized rate of 1.365 mil., which outperformed the median forecast calling for a 2.4% rise to 1.345 mil., and included an upward revision the prior month. Single-family starts rose by over 2% (to one of the strongest months of this business cycle so far), while multi-family starts gained nearly 5%. Regionally, the starts in the South outshined other regions by rising 10%, while those in the Midwest (down -15%) and Northeast also declined. Year-over-year, starts are 14% higher, with single-family starts in the lead. Building permits also rose, by 1.4% to 1.482 mil., which bucked expectations for a decline of -3.5% on the month, and reaching a high point not seen since mid-2007. In similar fashion, single-family permits rose just under 1%, with multi-family up over 2%. Permits in the Northeast and Midwest each gained 15-20%, while those in the South declined by -5%.
(+) The NAHB homebuilder index rose by 5 points in December to a level of 76, beating expectations calling for a minor decline. In fact, this result was a 20-year high for the series. The individual data was highlighted by a sharp gain in current sales, followed by prospective buyer traffic, and future sales, which ticked up a single point. Regionally, the Midwest represented double-digit gains, followed by the South, while the Northeast and West experienced declines for the month. While some housing market metrics have certainly improved, this indicator points to stronger homebuilder sentiment. This, on top of generally improving housing sales and starts data, could bode well for coming months in that sector.
(+) The final edition of the Univ. of Michigan consumer sentiment index for December ticked up 0.1 of a point to 99.3, which beat expectations calling for no change. The change was driven by current conditions, which rose by 0.3%, as expectations for the future were flat. Inflation expectations for the coming year fell by -0.1% to 2.3%, as did those for the next 5-10 years to 2.2%.
(0) The Conference Boardâs Index of Leading Economic Indicators for November was unchanged, breaking the string of several months were the index fell by a few tenths of a percent each. Last monthâs showing appeared to be led by strength in residential construction, the stock market, and positive consumer sentiment; these were offset by weakness in manufacturing and jobless claims. The last six months for the LEI have declined at an annualized -0.4% rate, which is the mirror image of the annualized gain of 0.5% over the prior six-month period covering the first part of 2019. The coincident economic index increased by 0.4% for the month, contributing to a positive result over the last six months, while the lagging economic index rose by 0.5% in November. The slightly better net economic results have tempered the decline in this index somewhat, although growth continues to be hard to come by. At the same time, this decade-long cycle has consisted of several mid-cycle slowdowns where the LEI has faltered.
(+) The government JOLTS job openings measure showed a rise of 235k jobs to 7.267 mil. in October, which surpassed the 7.009 mil. expected. The job openings rate rose by 0.2% to 4.6%, the quits rate was flat at 2.3%, while the hiring rate and layoff rate each declined by a tenth of a percent to 3.8% and 1.2%, respectively. This measure continues to demonstrate evidence of a strong underlying job market.
(0) Initial jobless claims for the Dec. 14 ending week fell by -18k to 234k, but still remained a bit above the forecasted 225k level. Continuing claims for the Dec. 7 week rose sharply by 51k to 1.722 mil., far above the 1.676 mil. level expected. The initial claims number partially reversed the strong increase the prior week, with certainly an impact from the timing of Thanksgiving. Winter claims also seem to be affected by seasonal issues around the end of the year, also experienced over the past several years.
Question of the Week: What look to be key issues going into 2020?
The term âoutlookâ can be misleading, as most forecasts tend to be partially to very off-base in hindsight. So, this question is best answered as a summary of whatever is currently top of mind going into the New Year. Some of these change from year-to-year, while others have been ongoing.
- Presidential impeachment proceedings. Now that this has escalated to a full trial in the Senate, expectations for an acquittal or lighter âcensureâ appear the highest-probability outcome. Of course, anything that throws these expectations off track could affect financial markets, as would any implications for the upcoming Presidential race (see below). Despite all this, polls have shown Americans are relatively steadfast in their support one way or the other following the high-profile and contentious proceedings so far.
- Trade between the U.S. and China. While âphase oneâ of a deal has technically been agreed to, it remains under legal review and has yet to be finalized. While the process of achieving further agreement remains likely a long one, the hope is that further tariffs can be paused and/or coupled with an easing of existing restrictions. Following the various announcements, which financial markets have tended to view optimistically, follow-through is also an issue, as details have been vague and implementation has been spotty historically.
- Trade between the U.S. and other countries. While the issues between the U.S. and China have taken most of the headlines, increasingly protectionist policies affect other relationships around the globe. This has been highlighted (and possibly solved) by the U.S.-Mexico-Canada trade agreement (USMCA) replacement for NAFTA, assuming final approval is just a formality. Also, there are a variety of other skirmishes with Europe, notably with France over their imposition of a âdigital taxâ, which affects a disproportionate number of U.S. tech firms, and was countered with a symbolic severe 100% tariff on items of French cultural significance, such as Champagne, cheese, etc. Other export-heavy nations, such as Germany (especially with autos and industrial equipment), are also sensitive to these protectionist pressures.
- Presidential election. This is potentially volatility-inducing, based on polling results and sentiment. Politics aside, the key financial market issues here are: (1) a Republican administration (Trump) would retain the current pro-corporate policies, such as a low tax regime and reduced regulatory burdens; (2) a Democratic regime (especially Warren or Sanders) could raise fears of anti-competitive review of certain behemoth companies, such as in technology, attempt a rollback in tax cuts or reestablish a more restrictive regulatory environment. There are sector concerns here as well, which weâve discussed previously. Overall, an incumbent president has a lot to lose by the economy going into recession just prior to an electionâitâs almost a sure-fire formula for a regime change.
- Economic growth/stage of the business cycle. How long will this already-long cycle continue? That is the key question, and may continue to be so until we eventually have a recession. A decade of recovery since the financial crisis is already a record in the modern era (last 100+ years, at least), but we have experienced several mid-cycle slowdowns over that time (which can look like a recession is beginning, even when it doesnât end up unfolding). Growth has been slow throughout, though, which has reduced the amount of âexcessâ in the economy, and possibly, the damage from a recession, if one were to occur in the near-term.
- Yields and Fed policy. The U.S. Federal Reserve has effectively announced that the three rate cuts in 2019 are it for the time being, the certainty about which the market seems to appreciate. However, the bar for raising rates has been raised, due to concerns over a lack of broad inflation. The Fedâs predictions for the future, though, similar to other economists, have shown mixed accuracy. Other central banks around the globe, such as the ECB and Bank of Japan, have remained steadfastly accommodative, keeping interest rates at negative levels, in addition to other stimulus, in response to very low inflation and economic growth. Looking at the long-term drivers of demographics/labor force growth and productivity, such meager conditions do not appear likely to abate soon.
- Equity earnings and valuations. One concern is about U.S. markets, following a strong period of above-average absolute returns and relative outperformance over foreign equitiesâhow long can it go on? Valuation has tended to be a poor predictor of near-term performance, but can be useful in looking at upcoming multi-year performance. In this framework, a period of lower returns following a decade of high returns compared to historical norms wouldnât be surprising. But markets continue to surprise in the meantime, so those who have moved to more defensive positioning too early can miss out on continued strength. Earnings growth has tended to be the primary driver of long-term equity results, however, which is a reason stocks often decline prior to recessions and perform well during periods of economic expansion. At the same time, the world has become more convoluted, with U.S. companies earning increasing amounts of revenue from abroad, and vice versa, so, aside from currency impacts, company domicile outright is less useful in broad brush equity market evaluations than in the past.
- The wildcards. They are always there, whether it be geopolitical flare-ups, weather disasters, political regime changes, or other surprises. As always, portfolio diversification can help ease the volatility of these.
Market Notes
| Period ending 12/20/2019 | 1 Week (%) | YTD (%) |
| DJIA | 1.14 | 24.98 |
| S&P 500 | 1.68 | 31.05 |
| Russell 2000 | 2.10 | 25.69 |
| MSCI-EAFE | 0.64 | 21.43 |
| MSCI-EM | 1.91 | 14.69 |
| BBgBarc U.S. Aggregate | -0.30 | 8.54 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2018 | 2.45 | 2.48 | 2.51 | 2.69 | 3.02 |
| 12/13/2019 | 1.57 | 1.61 | 1.66 | 1.82 | 2.26 |
| 12/20/2019 | 1.58 | 1.63 | 1.73 | 1.92 | 2.34 |
U.S. stocks experienced solid gains in the wake of the U.S.-China phase one deal announced the prior week. From a sector perspective, several groups gained over 2% on the week, including utilities, communications, energy, and health care. Industrials was the laggard, moving only a fraction of a percent higher, due to apparent weakness in FedEx results and negative sentiment surrounding the Boeing 737 Max production shutdown. Real estate also fared in the middle of the pack despite higher interest rates during the week.
Foreign stocks were mixed, with flattish results on net in developed markets. The U.K. pound gave back some of the prior weekâs gains, as the âbuy the rumor, sell the newsâ adage seemed to hold true concerning the pro-Brexit elections, yet uncertainty remains concerning the implementation. European stocks fared well, despite Eurozone manufacturing PMI falling further into contraction, for almost a year straight, despite estimates calling for a bottoming and near-term turnaroundâbut keeping stimulus hopes intact. Japanese stocks fell, as the BOJ kept interest rates and stimulative monetary policy unchanged. Emerging markets fared best, with continued optimism over the U.S.-China trade agreement leading sentiment, in Asian markets mostly outside of China, as well as Brazil.
U.S. bonds declined in price, along with rising interest rates that coincided with higher economic and geopolitical optimism. Investment-grade credit outperformed treasuries slightly, while high yield bonds and leveraged bank loans earned positive returns in line with other risk assets for the week. Foreign bonds in developed markets fared similarly in local terms, but ended up lagging to a greater degree due to a stronger dollar last week. However, emerging market currencies actually strengthened against the USD, enhancing performance.
One unique event in the foreign bond market, was Swedenâs decision to exit the negative interest rate experiment, by moving short-term policy rates back up by a quarter-percent to 0.0%. While a minor market in the whole scheme of things, this may be a sign of the abandonment of an unusual policy that creates a variety of problematic side effects for a variety of functions in the financial sector.
Commodities were up slightly overall during the week, despite a stronger dollar, led by gains in energy and industrial metals, which fell along the same lines as the pro-risk theme helping equities. The price of crude oil rose by almost a percent to around $60.50/barrel, with lower concerns over forward demand.
Mortgage Rate
âThe economy continued to pick up momentum with a solid increase in residential construction, improvement in industrial output in our nationâs factories and a rise in job openings,â said Sam Khater, Freddie Macâs Chief Economist. âWhile the economy is in a sweet spot, improvements in housing market sales volumes will be modest heading into next year simply due to the lack of available inventory.â
Khater continued, âThe demand is clearly not being met for entry-level Millennials and trade-up Generation X home buyers. If there was more inventory of unsold homes for buyers to choose from, home sales would be rising at a faster rate.â
The 30-year fixed-rate mortgage averaged 3.73% with an average 0.7 point for the week ending December 19, 2019, unchanged from last week. A year ago at this time, the 30-year FRM averaged 4.62%.
The 15-year fixed-rate mortgage averaged 3.19% with an average 0.7 point, unchanged from last week. A year ago at this time, the 15-year FRM averaged 4.07%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.37% with an average 0.4 point, up slightly from last week when it averaged 3.36%. A year ago at this time, the 5-year ARM averaged 3.98%.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrwa.com and our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poorâs, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.